What are Binary Options?

Introduction:

People who are actively involved in the financial market and wish to increase their capital as much as possible can be divided into two groups, namely investors and speculators. While investors often want to invest their capital in the medium or long term with a certain level of security, speculators are more interested in high profits that can be achieved in a short time.

Because of this difference, different financial products are often suitable for these two groups. For example, the speculative “investors” often use derivatives, and here especially often options. A relatively new variant in the field of options is the so-called Binary Options. More and more private customers are interested in trading in binary options, which has good reasons. But what exactly are Binary Options?

Binary Options definition and how do they work?

The product name “Binary Options” consists of two terms that require explanation, namely “binary” and “option”. You may already be familiar with the option from the field of classic stock options and it basically involves the right for the holder to buy or sell a certain underlying asset up to a certain point in time at a fixed price.

The term binary comes from the computer world and basically means that there are only two values, namely one and zero in the programming world. Applied to options, this means that binary options basically only know two “states”, namely in the profit zone or out of the profit zone (from the customer’s point of view).

See the method of Binary Options in the picture below:

Example Call Option: You win the profit if the closing price is higher than the opening price
Example Put Option: You win the profit if the closing price is higher than the opening price

The binary option also only works with an underlying asset to which the option refers. Underlying assets can be stocks, indices, currencies, and commodities. The binary option, therefore, involves you deciding on an underlying asset and whether the price will fall or rise in the future. Accordingly, you choose a call or a put option.

How do exactly set up a Binary Options trade:

  1. Choose the market you want to trade/analyze (underlying asset)
  2. Analyze the market and make a forecast of the price movement
  3. Choose the expiry time of the Binary Option
  4. Choose the investment amount
  5. Open the trade on rising or falling prices

What makes binary options trading attractive?

There are a number of reasons why Binary Options are becoming an attractive form of speculation for more and more investors. A major advantage of these special options is that they are much easier to understand than the classical options. This is because with classic options you have to deal with ratios such as omega, delta, or leverage, which requires a considerable amount of knowledge.

With Binary Options, on the other hand, you only need to decide on an underlying, the term of the option and the “direction”, i.e. whether you want to speculate on a falling or rising price. Another advantage of Binary Options is that they can be traded with very little capital. Some brokers allow clients to trade a Binary Option for as little as ten euros. The fact that trading with Binary Options is now also possible on the move with many brokers, i.e. also from on the road and at any time, certainly also contributes to the attractiveness.

  • Easy to understand
  • Low minimum deposit
  • Fixed payout
  • Fixed risk
  • Fixed expiry time
  • High yields are possible in a low amount of time

When do I make profits and when do I incur losses?

An incentive for trading in Binary Options is the high profits that you as an investor can sometimes achieve in minutes, which is only possible with a few other financial products. With simple Binary Options, the objective is for the price of the underlying asset to be either higher (purchase of a call option) or lower (purchase of a put option) than at the time the option was purchased.

There are only 2 ways:

  • Call option (buy)
  • Put option (sell)

For example, if you buy a call option with gold as the underlying, and the price of gold at the option expiration is higher than at the time of purchase, you make a profit. Depending on the broker, this profit is approximately 70 to 90 percent.

The profit is depending on the market and broker

In addition, there are several variants of Binary Options that even allow profits of up to 500 percent. However, with all these potential and high profits, you must not forget that you can also suffer a high loss very quickly. This loss can often be a total loss, but there are also some brokers who offer loss protection of up to 15 percent. A loss is always deemed to have occurred if the price/price of the underlying asset is lower (call option) or higher (put option) at the option’s maturity than at the time of purchase.

Profits and losses occure:

  • Win the profit if closing price is higher/lower than the opening price (up to 100% on classic Binary Options)
  • Get the money back if the cosing price is the same than the opening price
  • Lose the investment amount if the price goes into the wrong direction

What do I have to do if I want to trade in binary options?

If you want to trade Binary Options, the first step is to open a trading account with a broker that allows you to trade Binary Options. Registration with the broker and opening the account is always free of charge. With some brokers, you can also use a free demo account to learn how to trade.

After opening an account, you only need to deposit money into the trading account, which can usually be done by credit card or bank transfer. Depending on the broker, the minimum deposit varies between $ 10 and $ 250. After the deposit has been credited to your trading account, you can choose a Binary Option, buy it by means of given trade order and then wait until maturity to see if you have made a profit.

What do you need for trading Binary Options:

Choose a reliable Binary Options Broker

Before you start trading you should pay attention to the Binary Options Broker you choose. There are a lot of scam companies and websites on the internet. Never trust a person who wants your money directly. In the past, many beginners got scammed because they wanted to trade Binary Options.

To be sure that you trade with a reliable broker you can check the regulation and company behind it. On this site, I present you only trusted Binary Options Brokers. See the list below.

Before you start trading you should check the following points in order to do not get sammed:

  • URL of the website – Is it the right website?
  • Do not trust exaggerated promises
  • Regulation of the broker and company
  • Demo account – Can you test the platform for free?
  • Payment methods – Are they safe?
  • Minimum deposit – Can you try it with a small amount of money?

With the following providers, you can trade Binary Options by using the best conditions. Create a demo account for free:

Broker:

Rating:

Advantages: 

Start trading: 

IQ Option logo
5/5

+ Yield up to 100%
+ Best platform
+ 24/7 support

Deriv logo
4.5/5

+ Yield up to 95%
+ Auto trading (bot)
+ MetaTrader 5

Pocket Option logo
4/5

+ Yield up to 92%
+ Bonus program
+ Accept any clients

Conclusion: Binary Options are a speculative finance instrument

In this article, I explained to you what are Binary Options and how do they work. Binary Options are a speculative finance instrument for betting on rising or falling prices. It is very easy to understand how it works because the expiry time, loss, and profit are limited.

Binary Options are very attractive for beginners who are searching for a fast profit. It is possible to trade them in short-term trades and long-term trades. But if you want to start with Binary Options you should choose a reliable broker. As discussed before, there is a lot of scam on the internet. So be aware of it every time.

For a successful trading career with Binary Options, I recommend starting with a free demo account first. This is an account with virtual play money. So you can test the platform for free without any risk. If you feel comfortable you can start with small amounts of money and scale-up.

Happy Trading!


Read my other articles about Binary Options:

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